Blogs

Fleet Operating Costs Remain Stable for Fourth Consecutive Year

The stability of fuel pricing over the past 36 months, along with ongoing improvements in vehicle fuel economy, have been the key factors keeping fleet operating costs relatively flat. Since fuel spend makes up, on average, approximately 60% of a fleet’s total operating costs, the trajectory of the price per gallon of fuel has a huge impact on overall operating costs. Chart courtesy of Gasbuddy.

During the course of assembling the data for the 2017-2018 Automotive Fleet Fact Book, the top story, in my mind, is that calendar-year 2017 starts the fourth consecutive year that overall fleet operating costs have remained stable when compared to the preceding year. The stability of fuel pricing over the past 36 months, along with ongoing improvements in vehicle fuel economy, have been the key factors keeping fleet operating costs relatively flat. Since fuel spend makes up, on average, approximately 60% of a fleet’s total operating costs, the trajectory of the price per gallon of fuel has a huge impact on overall operating costs.

The second highest fleet operating expense is the cost for replacement tires. Replacement tire pricing for CY-2016 were flat compared to CY-2015. A key reason was less volatility in the price of commodities used to manufacture tires, namely oil, rubber, and steel. These lower materials prices kept replacement tire costs flat. With commodity prices remaining low – particularly oil – material costs have not shown much fluctuation. In addition, increased imports of low-cost replacement tires from abroad has helped keep average prices down.

The third highest operating expense, fleet maintenance costs, has also remained flat due to increased overall vehicle quality. Also, contributing to this decline has been increased engine protection by new motor oils, improved component engineering for engines and transmissions, onboard diagnostics, and faster OEM response time to component failures.

Data courtesy of the U.S. Energy Information Administration.

Impact of Fuel Prices on Vehicle Acquisitions

It is well documented that fuel prices influence vehicle acquisition decisions. Buyers in the new- and used-vehicle markets base their acquisition decisions on fluctuations in fuel prices. When fuel prices are high, there is increased interest in hybrids and smaller vehicles. Likewise, when fuel prices are low, buyers are more willing to consider larger, less fuel-efficient vehicles. In recent years, lower fuel costs have created an upward pressure on truck and compact SUV resale values, resulting in a lower cost per mile and making these vehicle classifications more affordable to operate. Conversely, lower fuel prices have impacted the sales of hybrids and alternative-fueled vehicles by decreasing demand for these types of vehicles.

The commercial fleet market is very diverse covering all segments of the U.S. economy, which sometimes creates contradictory market forces. For instance, one factor driving acquisition decisions, especially at multinationals, is corporate sustainability initiatives. Since higher fuel efficiency translates into lower emissions, meeting sustainability mandates forces acquisition decisions to focus on smaller displacement, more efficient engines. These acquisition decisions have contributed to increased average fleet fuel economy and a reduction in overall fuel consumption. For instance, fleets are rightsizing their vehicle selectors to take advantage of more fuel-efficient engine technologies, weight reduction measures, and higher-speed transmissions to meet sustainability initiatives. The use of data analytics is helping to further refine fuel management and sustainability strategies.

But, there is a limit as to how much fuel savings can be wrung from the types of vehicles acquired without impacting the fleet application. Once asset limitations are reached, the best way to reduce fuel expenditures is to modify employee driving behavior.

Beware of Complacency

Most fleet management companies use the U.S. Energy Information Administration (EIA) of the U.S. Department of Energy forecasts for internal planning and external fuel price forecast dissemination. The EIA forecasts an uptick in gasoline prices in CY-2018 to an average of $2.45 per gallon, compared to an anticipated average of $2.34 in CY-2017. The biggest danger from today’s lower fuel prices is complacency, on the part of both drivers and fleet managers, and the mistaken belief that fuel reduction initiatives do not require the same emphasis as in the past.

Despite the actual price of a gallon of fuel – whether it is high or low – minimizing your fuel spend should remain a top priority.

If you think being a fleet manager is stressful, try being a Navy SEAL. Former Navy SEAL Robert O'Neill, best known for claiming to have shot Osama bin Laden, recently wrote a new book entitled, “The Operator.”

Conventional wisdom in the fleet market is often wrong. If we roll back the calendar, the conventional wisdom about fuel prices was that there would be ebbs and flows in price per gallon rates, but the overall price trajectory would trend upward. The flaw with conventional wisdom is that it only works when no new variables are inserted into future projections. A case in point is the shale oil revolution, which now has experts predicting oil prices will remain flat for the foreseeable future.

Summer is a busy time in fleet. There’s an abundance of next-model-year OEM fleet meetings, new-model intros, and industry conferences, which offer ample opportunities to “talk fleet” with the movers and shakers of our industry. If you want to know what's happening in the fleet market, you need to talk with fleet managers -- lots of them.

Senior management exerts intense pressure on fleet managers to control and/or reduce vehicle acquisition and operating expenses. To accomplish this, a fleet managers can pursue three different cost-control strategies — cost savings, cost deferral, or cost avoidance. In order to implement a successful cost-control strategy you need to institutionalize the mechanisms to curb money-wasting behaviors.

To be successful on a sourcing team, you need to be open-minded about exploring all available service channels and partners. However, open-minded doesn’t mean being open-headed. You must listen and entertain new ideas, but also temper such a practice and attitude with pragmatism and knowledge.

In the long run, technology will exert inexorable downward pressure on overall fleet size and will eliminate altogether the need for some fleet vehicles. Despite this, fleet management will survive, albeit in a smaller capacity, and, most likely, in a completely different form than what we know today.

I asked one fleet manager how he spec’ed replacement trucks for his fleet application. He related that many years earlier an OEM rep spec’ed out his trucks and he has been using the same formula ever since. While this may work in some cases, specifications should be defined by today’s fleet application to ensure the replacement truck is designed to accommodate current operational requirements rather than trying to make your operation conform to trucks spec’ed for yesteryear’s requirements.

Reducing fleet costs is a constant, never-ending struggle for all fleet managers, especially since every aspect of fleet management revolves around money. In lieu of requesting additional budget dollars, one course of action is to stop the waste of existing dollars.It is estimated that, on average, 5-10% of a fleet’s annual budgeted dollars are wasted.

One challenge to global fleet management is adjusting to different fleet terminology for different regions. One example is the difference between the use of “model-year” and “calendar-year” in describing the year of a fleet vehicle.

Properly identifying payload parameters is the foremost consideration to properly spec’ing a truck. To illustrate this fact, the weight of the payload will determine the engine, transmission, size of tire, frame, and just about everything else.

Looking ahead, how will procurement and fleet evolve in the future? My prediction is there will be market forces (both internal and external), along with technological enhancements, that will facilitate a much closer collaboration between the two disciplines using a combination of in-house and outsourced expertise.

In many ways, innovations in consumer technology are outpacing innovations in corporate technology. With this in mind, it is important to watch how technology is evolving outside of fleet and how it can be incorporated into day-to-day fleet management.